Monday, November 3, 2008

Obama is largely responsible for the recent market downturn

Of all the nonsensical banter and useless commentary Larry Kudlow makes, this one takes home the grand prize: the stock market has been pricing in an Obama win and this accounts for a significant portion of the recent down turn (the implication being that if McCain were expected to win, the markets would have performed better).

Well, luckily we can test this statement....sort of. The prediction markets currently have Obama at 90% and McCain at a 10% probability of winning the presidential election. Come tomorrow, if pricing in the presidency has accounted for any significant portion of the markets movement, assuming everything else constant, the stock market should have large intraday volatility, as the expectation value will rise to 100% by the end of the day for either Obama or McCain, in fact we would expect a volatile market for an Obama win and an extremely volatile market for a McCain, win given current expectation values.

We shall see...I think Kudlow has turned into a bit of a raving maniac (perhaps he always was). I doubt a pricing in of an Obama presidency accounts for any significant portion of the recent down turn, rather it's been a whole lot of magic gone bad: magical accounting, magical bond ratings, and magical financial products gone awry.

btw: I just went short GBP long USD. Long story short, the whole of Europe is roughly 6-12 months behind the US in terms of economic fallout, and Britain, especially British property in the south of England, has been propped up by Middle Eastern petro money (look at PM Brown go begging to the Sheiks) that is now fleeing for the dollar. I expect the CDS auction for the three Icelandic banks to be disastrous (higher payouts on the part of CDS sellers than even the Lehman auction, something like 97 cent payout on the dollar with the debt worth 3 cents on the dollar) with a large ripple effect through Great Britain and the Continent. Frankly, Iceland is economically in the crapper, and I would bet top dollar that it will try to join the Europen Union (already it is a member of the European Economic Area). Things don't look so great for Europe at the moment.

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